Sunday, September 7, 2014

The importance of market timing | Aussie dollar example

The importance of timing in Foreign
Exchange trading cannot be overemphasised. In this connection the currency
pairs we study all have their own price movement characteristics and
fundamental features.

Right now all news in relation to the
pound Sterling, for example, is dominated by the fear that Scotland will vote
for independence as a country in less than two weeks time. A poll over the weekend
exacerbated this fear, and there were large price gaps against the pound in
terms of all its major counterparts apparent on the charts this morning.

In the USA the Non Farm Payrolls report
was a real disappointment on Friday although we maintain, as always, that it is
the overall trend in employment rates that is important and not just one
particular data point.

Aussie
dollar example

As an example of the importance of
timing, consider the Aussie dollar against the US dollar. Our feeling is that
the bias in this pair is to the downside. This is based on the fundamentals of
the Australian economy and the belief that the pair is only supported by the
attraction for the Carry Trade of the interest rate differential of Australia against
all other major jurisdictions. At some stage the realisation will come that QE
is finally over in the US and that same Carry Trade will start to be
dismantled. It is not the actual ending of QE that matters, but rather the
timing of the realisation of the reality of this event on the large Hedge Funds
and institutions, in rather the same manner as they only seemed to wake up to
the imminence of the Scottish referendum as late as last week, to send the
British pound into a tailspin.

The chart above shows a tentative
move in favour of this thinking last week. On Tuesday 2nd September
it looked as if a fall in the Aussie had arrived. And the exchange rate was
moving in the anticipated downward direction, when Australian GDP figures came
in somewhat better than expected, causing this move to stall. Then, on Friday, as mentioned, US Non Farm Payrolls were particularly soft, which had the effect of placing
everything related to the Aussie / US dollar pair back to where it was before –
in a protracted sideways movement.

So, to get the timing right here we
must, perforce, wait a little longer.